How much to save for retirement has traditionally been a core question in financial planning. It’s still a key question and it’s probably the main component of retirement planning that folks seem to focus on. What people are really asking is whether the resources they have will match their needs, goals, and longevity. Asking how much you need is overly simplistic, but it is how people frame the idea. Having a target in mind is great, but you probably shouldn’t focus on a singular number.
Let me give you this analogy. If you ask a pilot, ‘what’s the one thing that makes a plane fly?’ and the pilot answers, ‘lift.’ Now you know the one thing that makes the plane fly; are you able to fly the plane? Not likely. It’s the same with focusing on a singular target number for retirement. It seems these days that in our society, people want things made simplistic and boiled down to a simple answer. Unfortunately, knowing that lift makes the plane fly doesn’t make you a pilot. What about prepping it for takeoff, knowing how to throttle up, set the ailerons, and the ground speed you need to achieve lift? What about maneuvering and safely flying to your destination and executing a successful landing? Another thing, on what type of aircraft are you planning to fly? It’s the same idea with knowing how much you need for retirement. It’s not so simple. Let’s look at some factors that affect your goal.
Traditionally, many planners recommended replacing a percentage of your income. Usually, 80% was a general target. That may no longer be valid. Let me ask you this, if you retired today, could you live on 80% of your salary? What about in 10, 20, or 30 years? If so, how well could you live? Would it be a challenge? Would there be any room in your budget for activities you actually want to do? To put it simply, are you planning to fly economy or first class? Do you think a retiree in the early 1990s could envision coffee costing nearly $5 today, or the exorbitant cost of health care or rent? This is why I like to err on the side of caution and recommend people save as much as possible for their retirement. After all, who ever truly complained about having too much money?
When do you plan on retiring? A quick scan of the general press and the financial news will show you that the traditional concept of retirement is rapidly fading. Many Boomers are continuing to work well past traditional retirement ages like 62 or 65. If not full-time, many work seasonal jobs, consult, or work part-time. Dig in to find out why and you get as many different answers as the number of people you ask, but at the core, it’s about money. Some are continuing to work because they like work, want to stay active, and can secure health care benefits via their employment. Others want to beef-up their retirement savings. Unfortunately, some have to work because they didn’t save enough in their younger working years, invested too conservatively, or they experienced a grave financial loss at or near retirement.
Photo credit: Time.com
Longevity is playing a bigger role in planning as well. In the past, few people lived beyond their late-60s once they retired. Planning to live another 30 or even 40 years was a foreign concept. Today, thanks to better health care, more comfortable lives, and jobs that are not necessarily as physically demanding, people are living much longer. On February 23, 2015 Time magazine declared their cover baby could live to age 142. That may be optimistic. My nephew is 14 and his generation will likely live into their mid-hundred-teens. For his age group, 115 will most likely be common. If you think I am exaggerating, read the Time article and do some web searches on longevity. Gerentology.Wikia tells us that there are currently 77 people in the United States aged 110 or older. Shockingly, over 92% are female. Of those 77 people, only 6 are male. They don’t report the mere centenarians!
Knowing these very basic trends, how much should you be saving overall for retirement? Currently, many advisors recommend saving at least 15% of your earnings from every job you ever have over your lifetime. This is a great baseline, and good to know if you are just starting out, but may be insufficient for your goals or the age when you plan to retire. Saving 20% of earnings may be necessary. How you invest this savings will also factor into the equation. Too conservative and your investments may not grow sufficiently. Too risky or concentrated and you could lose money just when you need it. Again, having a financial planner in your corner can give you an advantage. You can discuss your future plans, family longevity, retirement goal, and target your savings and investments to get on the road to a financially healthy future. Saving 15% of your lifetime earnings may be a starting point. If you plan on retiring early, you may need to save more. Keep in mind, time and compounding are your friends while you are young.
If you are reading this and you are in your 20s or 30s, I beg you to save as much as possible as soon as possible. If you can, save more than 15% while you are working. Interest and growth on your investments for 40 or 50 years, or more, will be your friend! If you are older, seriously consider your current spending, slashing things from your budget you no longer need or enjoy, looking for additional income, and consider meeting with me to discuss planning options and see where you might end up. Check your investment allocation against your risk profile as well. It’s possible you may need to make a course adjustment.
As an independent Certified Financial Planner™, I can help you start saving, manage debt, and begin or refine your wealth-building journey. Contact me and let’s get started on a plan! #talktometuesday #education #Hireaplanner #retirement #savings #age100 #time